case studies of markets and innovative financial mechanisms for water services from forests....

7/24/2019 Case Studies of Markets and Innovative Financial Mechanisms for Water Services From Forests. Perrot-Matre, Danile and Davis, Patsy. 2001

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Case Studies of Markets and Innovative Financial Mechanisms forWater Services from Forests

Danile Perrot-Matre and Patsy Davis, Esq.

May, 2001


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Forest Trends

Forest Trends, a Washington, D.C. based non profit organization, was created in 1999 by a team

of entrepreneurial individuals representing conservation organizations, forest product firms,research groups, multilateral development banks, private investment funds, and foundations. Itsmission is to maintain and restore forest ecosystems by promoting incentives that diversify tradein the forest sector, moving beyond exclusive focus on lumber and fiber, to a broader range ofproducts and services. To fulfil its mission Forest Trends performs three principal roles -convening market players to advance market transformations, generating and disseminatingcritical information to market players, and facilitating deals between different critical links in thevalue chains of new forestry.

Forest Trends is committed to supporting sustainable forestry - believing that only by preservingand expanding sustainable forests can the needs of a wide variety of stakeholders be met.Profitable businesses can provide for human wood and fiber needs, communities can shareequitably in the benefits of a forest-based commerce, and healthy and diverse forests can bemaintained today and into the future. Though many environmental services generated by forestsare beneficial to society, Forest Trends has focused on those that are activating market interest:carbon storage, watershed protection and biodiversity conservation.

The Katoomba Group

The Katoomba Group is an international working group or "skunkworks" composed of leadingexperts from forest and energy industries, research institutions, the financial world, andenvironmental NGOs, all dedicated to advancing the development of markets for environmentalservices. The Group is dedicated to building collective understanding of how market-basedinstruments for environmental services are constructed and the conditions in which they can

work, to facilitating strategic partnerships, and to providing technical support to pilot projects ofbroad relevance. The Group met for the first time in Katoomba, Australia in May 2000 andsubsequent meetings have been held in Vancouver, British Columbia in October, 2000 and inBrazil in March 2001. Forest Trends serves as the secretariat for this group and co-ordinatesinter-sessional work.


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There is growing awareness of the many services forests provide, such as watershed protection,biodiversity conservation and carbon storage. There is also growing awareness of the costs to

society when these services are degraded or lost. These costs may come from the local effects ofdegradation, such as floods and landslides, or more global effects, like global climate change.These impacts are drawing attention to the financial benefits of healthy forest ecosystems and theecological services they provide - benefits of great social value but until recently of no greatfinancial worth. This interest and the growing number of innovative investments around the worldare moving markets for ecosystems services towards center stage in the debate about forestconservation.

One emerging ecological market is for hydrological services offered by natural forest and wetland

ecosystems. Hydrological services, such as water quality and water flow, are among the mostvaluable ecological services that forests produce. Not only is the global market for water huge butinvestments in sustainable watershed management have been shown in several cases to becheaper than investments in new water supply and treatment facilities. In order to advance thedevelopment of these markets it is important to capture lessons from the many innovativeecological markets around the world.

Case Studies of Markets and Innovative Financial Mechanisms for Water Services from

Forests describes nine casesfrom around the world - the United States, Colombia, Brazil, CostaRica, France, and Australia selected to represent various types of financial mechanisms invarious settings. After a global scoping we have chosen cases in which administrative andfinancial mechanisms capture the value of hydrological services provided by forests and areinnovative in that they have only recently been either used or considered for use in the forestrysector. In most - if not all - of our cases it is not a question of either a market or a regulatoryapproach rather the mix of the two.

A companion paper, Developing markets for water services from forests, by Johnson, N., White,

A. and Perrot-Matre, D. (2001) examines the cases presented in this paper, distills commonissues and lessons, describes the basic types of financial incentive mechanisms, the commonissues in developing these mechanisms and gives a conceptual framework to what is happeningaround the world in the emerging markets for hydrological services. It also offers guidance for thefuture use and development of market based instruments for such services. (The two papers canbe found on the Forest Trends website: http://www.forest-trends.org.)

Both of these papers were developed as the result of the Forest Trends workshop on Developing

Markets for Environmental Services at the October 2000 meeting of the Katoomba Group inVancouver, British Columbia. There have been many valuable inputs from Katoomba groupmembers, some of whose innovations are described here.

Forest Tends is particularly fortunate to have Danile Perrot-Matre, a French environmentaleconomist, as a consultant to Forest Trends and a co-author of this report. The second author isPatsy Davis a Forest Trends attorney


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ACKNOWLEDGEMENTS

The authors would like to thank

Andy White, Forest TrendsNels Johnson, World Resources InstituteMichael Jenkins, Forest TrendsEchavarria Marta, Eco-decisin, EcuadorManrique Rojas, Eco-decisin, Costa RicaMarlou Tomkinson-Church, The Nature ConservancyBruce Aylward, Independent consultant

Sandy Allen, New York WatershedRichard Combe, Watershed Agricultural CouncilKaren Router, Watershed Agricultural CouncilLuis Gmez, Costa Rican Ministry of Environment and Energy (MINAE)Mr. Pierre, Agrivair Vittel-ContrexMr. Teysseyre, Vittel ProgramJacques Cadne, PerrierSerge Ramon, Rhin-Meuse Water AgencyDr. Jacques Brossier, Institut National de la Recherche Agronomique (INRA)

David Brand, Carbon Programs for Hancock Natural Resource GroupPaul J. Ferraro, Cornell UniversityChristopher Miller, US-Environmental Protection AgencyStefano Pagiola, The World BankRex Cruz, The University of the Philippines at Los Baos


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TABLE OF CONTENTS

INTRODUCTION ........................................................................................................................................1CASE 1 - FRANCE: PERRIER VITTELS PAYMENTS FOR WATER QUALITY........................... 4

BACKGROUND........................................................................................................................................ 4REFERENCES........................................................................................................................................... 7

CASE 2 - COSTA RICA: HYDROELECTRIC UTILITIES FINANCING OF UPSTREAMREFORESTATION......................................................................................................................................8

BACKGROUND........................................................................................................................................ 8

REFERENCES......................................................................................................................................... 11

CASE 3 - CAUCA RIVER, COLOMBIA: ASSOCIATIONS OF IRRIGATORS PAYMENTS FORIMPROVEMENT OF STREAM FLOW..................................................................................................12

BACKGROUND......................................................................................................................................12REFERENCES......................................................................................................................................... 15

CASE 4 - UNITED STATES: NUTRIENT TRADING........................................................................... 16

BACKGROUND......................................................................................................................................16

REFERENCES......................................................................................................................................... 20CASE 5 - AUSTRALIA: WATER TRANSPIRAION CREDITS .......................................................... 21


CASE 6 - NEW YORK CITY: WATERSHED MANAGEMENT PROGRAM...................................24


CASE 7 - COLOMBIA: ENVIRONMENTAL SERVICES TAX (ECO-TAX) FOR WATERSHEDMANAGEMENT ........................................................................................................................................30


CASE 8 - STATE OF PARAN, BRAZIL: PUBLIC SECTOR REDISTRIBUION MECHANISM 33


CASE 9 - UNITED STATES: THE CONSERVATION RESERVE PROGRAM................................37BACKGROUND......................................................................................................................................37REFERENCES......................................................................................................................................... 41

ANNEX 1: FEATURES OF INNOVATIVE CASES OF WATERSHED MANAGEMENT FROMAROUND THE WORLD...........................................................................................................................42


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Case Studies of Markets and Innovative Financial Mechanisms forWater Services from Forests

Danile Perrot-Matre and Patsy Davis, Esq.

May, 2001

Introduction

Well-envisioned and instituted management practices can help provide and enhance hydrologicalservices of forests. These services chiefly include increased water quality, increase in minimumflow during dry season (base flow), regulation of groundwater and surface flow and increasedaquatic productivity (See, Johnson, White and Perrot-Matre 2001). Though such hydrologicalservices are among the most valuable of the many ecological services offered by forests, theyhave, until recently, been considered external to market frameworks and provided for free byforest landholders.

Traditional strategies to encourage the maintenance and development of such services have beenbased on voluntary codes, legislative designation of protected areas, and regulation of land use.Because such methods have often been found to be inefficient, arduous to enforce and difficult tofund both the public and the private sectors have searched for new, lower cost approaches todeliver high quality water and other environmental services. A parallel development has been thegrowing realization that a wide variety of hydrological services are of real financial value tosociety. It is often cheaper and more efficient from societys standpoint to protect a service fromthe ecosystem, such as water purification or flood control, than building and maintaining artificial

structures such as purification plants and flood control structures. Markets for hydrologicalservices from forests are developing that attempt to capture externalities and internalize theminto positive incentives for forest landowners ---making ecosystem management a financiallyattractive alternative to degradation and deforestation. But all forestry problems are not solvableby the Market and some form of government involvement if only to ensure enforceability ofcontracts is necessary.

This paper has been written to examine existing markets and financial mechanisms that are being

used to provide hydrological services from watersheds and to assist forest owners andpolicymakers in assessing the advisability and feasibility of using such mechanisms.

After a global scoping of innovative cases of financial mechanisms we have chosen to describenine illustrative cases. These nine cases come from around the world - the United States,Colombia, Brazil, Costa Rica, France, and Australia and have been selected to represent varioustypes of financial mechanisms in various settings We have chosen cases in which administrative


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and will depend upon local physical, social and environmental characteristics. Although financialmechanisms are applicable at the watershed, the regional, state, national, or international level, in

practice they are most commonly used at the small watershed or sub basin level.

Annex 1 at the end of this paper presents a condensation of some of the key features from each ofthe cases. The companion paper, Developing markets for water services from forests (Johnson,White and Perrot-Matre 2001) presents a broad overview of the findings from these cases.

To facilitate analysis each case study is presented according to the following common set ofquestions:

-

What ecosystem service is being financed?-

Who is supplying the service?-

Who is paying for it?-

What instruments are being used?-

What is the legal context?-

What is the role of the public sector?-

What are the equity concerns?-

What is the intended impact on forests?

-

What are the lessons for designing similar systems?

Overview of Cases

We have adopted the typology of financial mechanisms used by Powell and White (2001) todescribe the wide variety of mechanisms in practice (Annex 1). This typology organizes theincentive mechanisms into three indicative categories, separated by the degree of governmentintervention in the administration of the mechanism. These three categories include self-organized private deals, trading schemes, and public payment schemes. In reality, of course, there

is continuum of mechanisms between the private and public sectors with each playing a widevariety of roles. In most of our cases various mechanisms are used in interrelated ways.A briefdescription of these mechanisms and some examples are described below.

The first category encompasses self-organized private dealsthat require little or nogovernment involvement. In these cases payments are made voluntarily by members of theprivate sector, such as private companies or associations of water users. For example, Perrier-Vittel, a French company that sells bottled water, pays upstream landowners to use best

management practices on their land to ensure that the company has a supply of quality water. InCosta Rica a utility company pays into a fund that pays private upstream landholders to increaseforest cover to provide regularity of water flow for hydroelectricity generation. In the CaucaValley, Colombia, associations of irrigators pay additional fees to a regional agency for landand forest activities to obtain a sufficient supply of water for crops.

Trading schemes the second category usually occur where government sets either a very strict


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credits by reforesting upstream lands a process expected to result in reduction of water salinitydownstream. Trading usually takes place within watersheds or sub-basins. Credits exchanged are

attributed a specific exchange value and are then traded on a market. Credit values are highly site-specific and, at least in principle, eventually will vary with supply and demand for the ecologicalservice.

Public payment schemes, by far the most common mechanism, are established when amunicipality, a state, or a national government decides to finance upstream activities such as landretirement or reforestation. In return the government entity expects improvement in hydrologicalservices downstream - for example provision of drinking water, regularity of flow stream or waterpurification. The program budget is not necessarily proportional to the value of the expected

benefits from the ecosystem service. In many cases no valuation of the expected benefits hasbeen done. The financing can come from various sources including general tax revenues, bondissues, or user fees. Often public authorities particularly when faced with budgetary crisis -require stakeholders benefiting from the ecosystem services of the resource to participate inwatershed protection. This is the case in Colombia where hydroelectric and water utilities arerequired by law to allocate a fixed percentage of their revenues to an ecosystem fund. In Brazil afew States have pioneered a new tax allocation system where a percentage of the state tax goesdirectly to those municipalities that protect hydrologically sensitive areas. Funds can also be

raised issuing bonds one of the methods used by New York City for its watershed project. TheConservation Reserve Program (CRP), a nationwide, voluntary, long-term retirement croplandprogram of the United States Department of Agriculture, is financed by general tax revenue. CRPgives various forms of incentive payments to farmers and forest landholders forland retirementand conservation practices to reduce soil erosion and improve water quality, regularity of streamflow and wildlife habitat.


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CASE 1 - FRANCE: PERRIER VITTELS PAYMENTS FOR WATER QUALITY

BACKGROUND

As water quality declines all over the world, the demand for bottled water is increasingdramatically and is expected to continue into the future. For those companies that sell bottled

water profitability depends not only on demand but also, and perhaps more critically so, on theirability to ensure spring water quality at reasonable cost. Companies have typically exploitedwater sources and moved on to new ones when water quality deteriorated. But some companies,such as Perrier Vittel S.A., the worlds largest bottler of natural mineral water, have come torealize that protection of water sources is more cost effective than building filtration plants ormoving continuously to new sources. In France in the late 1980s Vittel decided to embark on anaggressive management program.

What service is being financed?

Vittel designed and implemented its program in order to improve water quality by reducingnitrates and pesticides and restoring natural water purification in a sub-basin of the Rhin-Meusewatershed in northeastern France. Though the program activities include watershed reforestationand control of non-point source pollution from commercial activities, its major focus is onagriculture and is based on the assumption that improvement of farming activities can restore

Summary

What water-related ecological service is being financed? Quality drinking water.

Who is supplying the service? Upstream dairy farmers and forest landholders.

Who is paying for it? A bottler of natural mineral water.

What instruments are being used? Property acquisition: A companys purchase of hydrologically sensitive land. Compensation for services:Long term contracts between the company and

landholders surrounding the springs for improvement of agriculture practices andreforestation of sensitive infiltration zones.

What are the intended impacts on forests? Reforestation but limited impact because

program focuses on agriculture.


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Who is supplying the service?

Upstream dairy farmers and forest landholders

Who is paying for it?

Vittel has paid for the program at a total cost over the first seven years of approximately US$24.5million. (Agence de lEau, 1999). The French National Agronomic Institute (INRA) financed20% of the research and the French Water Agencies pays for 30% of the expenses for buildingmodern barns to improve animal waste management and for monitoring the appropriate use ofthese buildings.

What instruments are being used?

Property acquisition: For an estimated US$9 million Vittel purchased 1,500 hectares ofagricultural land around the Vittel springs. It enticed landowners to sell their lands byoffering prices higher than the market price and by offering to give back to those farmerswilling to improve their management practices a free usufruct of the land.

Compensation for services: Vittel signed 18 to 30 year contracts with farmers whoagreed to switch to less intensive dairy farming technology and pasture management.Such agreements cover about 40 farms consisting of over 10,000 hectares of farmland.Vittel does not make payments based on the relationship between pollutant contents andwater quality but rather compensates farmers for the risk and the reduced profitabilityassociated with the transition to the new technology. Vittel pays each farm about US$230per hectare per year for seven years. The company spent an average of US$155,000 foragricultural investment per farm or a total of US$3.8 million. Provision of incomesupport for such a long period of time is very unusual. European Union subsidies are

allocated a year at a time. The level of subsidy is also unusually high. On averagesubsidies account for 75% of the farms disposable income (INRA 1997). The companyalso provides the farmers with free technical assistance and pays for new farm equipmentand the modernization and construction of farm buildings. In exchange, Vittel ownsbuildings and equipment for the period of the contract and has the right to monitor theiradequate use.

What is the legal context?

Because of the pre-existence of water quality standards and a formal enforcement agency no newlaws were necessary to support this initiative (1964 Water Act). Water in France is managedthrough six water agencies that roughly correspond to its six major watersheds.

What is the role of the public sector?


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What are the equity concerns?

Unlike French public sector programs under which only large farms are eligible for subsidiesVittels program benefits farms of all sizes.

What are the intended impacts on forests?

Some reforestation has taken place but the impact of the program on forests remains limitedbecause of its focus on agriculture.


When Vittel purchased Perrier and Contrexeville, it exported the approach to these companies.The Contrexeville Springs are close to Vittel in northeast France and the model was easilyexpanded. The Perrier springs are located in southern France in an area of vineyards andintensive wheat cultivation where phosphates and herbicides are the main sources of waterpollution. There, Perrier successfully introduced biological agriculture to 20 farms that cultivateapproximately 350 hectares of cereals and 200 hectares of vineyards and regularly monitors over900 hectares of land. The highly favorable market conditions for organic produce madesignificant contribution to the rapid adoption of improved farming practices around the Perriersprings. Other French bottlers - Evian and Volvic - have considered using Vittels experience asa model.

Several issues may affect the potential for transferability:

Scale: The Vittel model may be difficult to use in a larger geographic area or in an area witha greater number of farmers.

Timing: If quality drinking water is needed immediately, Vittels agricultural and forestrypractices may not be able to achieve water quality targets rapidly enough to avoid the needfor purification plants.

Private sector profitability: Given the level of investment required, the Vittel model would,absent significant public sector financial support, appear to be restricted to highly profitableindustries or industries with a rapidly growing demand for their product.

Cost benefit analysis based on cost of alternatives to pasture management: Whether sucha program would be economically justifiable must be examined case by case. In the Vittelcase INRA conducted a cost-benefit analysis comparing the cost of water filtration throughfiltration plants and through pasture management. Based on the assumption that one hectareof well-managed pasture produces an estimated 3,000 m3 of drinkable water per year, thestudy concluded that the program was economically justifiable (INRA 1997).


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REFERENCES

Agence de lEau Rhin-Meuse. 1999. Programme AGREV, Agriculture-environnement-Vittel,Les Etudes des Agences de lEauNo.69.

Brossier J., Director, SAD Unit, INRA. 2000. Personal communication. September 11 and 12,2000.

Cadne, J., Director, Perrier Program. 2000. Personal communication. September 7, 2000.

Institut National de la Recherche Agronomique. 1997.Les dossiers de lenvironnement de lINRA

No. 14.

Pierre, Director, Vittel-Contrex Program. 2000. Personal communication. September 6, 2000.

Ramon, S., Rhin-Meuse Water Agency. 2000. Personal communication. September 11, 2000.

Teysseyre, Former Director, Vittel Program. 2000. Personal communication. September 8, 2000.


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CASE 2 - COSTA RICA: HYDROELECTRIC UTILITIES FINANCING OFUPSTREAM REFORESTATION

BACKGROUND

Although about one fifth of Costa Rica consists of protected lands, concern over deforestationand inadequate land use led the country to pioneer the establishment of compensationmechanisms for ecological services. The Government of Costa Rica established The National

Forest Office and National Fund for Forest Financing (FONAFIFO) to provide incentives forreforestation by compensating private landowners in exchange for their commitment to reforest,regenerate or leave forested land pristine. The Fund, financed in large part by a 5% national salestax on fossil fuel, was instituted primarily to protect biodiversity and did not focus on watershedservices. FONAFIFO has contributed to making the public and the economic sector aware of the

value of ecological services provided by forests.

Energa Global, a private hydroelectric company located in the Sarapiqui watershed, provides

electricity for about 40,000 people. Two sub-watersheds covering about 5,800 hectares are thesource of the companys water supply. Electricity production and revenues are maximized whenthe plant is running at full capacity and problems arise because the company is dependent onwater stored in two small reservoirs that can only store enough water for five hours.

What water-related ecological service is being financed?

Summary

What water-related ecological service is being financed? Regularity of water flow forhydroelectricity generation; protection of biodiversity.

Who is supplying the service? Private owners of forest land.

Who is paying for the service? Private hydroelectric company and a Government ofCosta Rica fund -consisting largely of fuel tax revenues - with a local NGO providingsome administrative expenses.

What instrument is being used? Payments made by utility company via a local NGO tolandowners; such payments supplemented by government funds.

What are the intended impacts on forests? Increased forest cover on private lands;expansion of forests through protection and regeneration.


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Private owners of forest land

Who is paying for the service?

Energa Global, a private hydroelectric company and a Government of Costa Rica fund -consisting largely of fuel tax revenues - with a local NGO providing some administrativeexpenses


Energa Global pays $18 per hectare to FONAFIFO. FONAFIFO then adds an additional $30 perhectare and then makes cash payments to those owners of upstream private lands who agree toreforest their land, engage in sustainable forestry and/or conserve their forested land. As a policy,landowners who have recently cleared their land or landowners planning to replace natural forestswith plantations are not eligible for compensation. An NGO, FUNDECOR, (Fundacin para elDesarrollo de la Cordillera Volcnica Central) oversees the implementation of the conservationactivities and manages the legal and administrative operation. The financial compensation ofabout $48.0 per hectare per year is not based on the value of the hydrological services but is theapproximate equivalent of the opportunity cost of foregone land development - mainly potentialrevenues from cattle ranching.


Because FONAFIFO was already established and FUNDECORs contributions are voluntary, nomajor change in the legal and regulatory framework was required.


The role of FONAFIFO, the government fund, supplements the funds provided by EnergaGlobal.


Forest regeneration and conservation through the FONAFIFO scheme has been criticized formainly benefiting large private forest landowners. Large landowners are better informed and canafford to conserve part of their lands. For smaller landowners such conservation efforts are morerisky. Also designers of such programs are more likely to want to develop programs using largeland holders because transaction costs of working with a small number of large landowners areless than those incurred in working with a large number of small owners.



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Fuerza y Luz, and CNFL) and another private company (Hidroelectrica Platanar) - arecompensating landowners through payments to FONAFIFO - it should be noted that CNFLfinances 100% of the compensation. Two private hydroelectric companies have set up purelyprivate initiatives thus bypassing the public sector entirely. One of these companies, the HerediaPublic Utility Company, has extended the concept to drinking water. Heredia increased the waterfee and is presently in the process of establishing a Trust Fund for watershed protection. Atpresent the stakeholders are still negotiating the final project design.

On the national level the Ministry of Environment is actively engaged in expanding the EnergaGlobal concept to the national electricity and water utility companies (ICE and AyA). Expandingthe compensation mechanism to national utility companies will require much more complex

changes in institutional and regulatory arrangements. A proposal has been made that all utilitiesbe legally required to pay for such services but the Costa Rican Congress has not acted upon it

A group of private consultants, exploring the possibility of using the payment of environmentalservices in Ciudad Quesada, a small rural town in northern Costa Rica, envisages includingwatershed land purchase. The program would be administered through FONAFIFO.

A slightly different example of private company financing is the agreement by Grupo de Oro, aCosta Rican grower and processor of oranges, to pay an equivalent of $5.0 per hectare tocompensate the Guanacaste Conservation Area (GCA) for water and insect pollination ecologicalservices. The National System of Conservation Areas (SINAC) of the Ministry of Environmentand Energy (MINAE) manages the GCA.

The following are issues that should be considered wherever similar approaches are beingconsidered:

An electricity tariff structure establishes tariffsfor state-owned electric utility companies that

are higher during the dry season may discourage investment in land and forestry practices.

The actual value of the ecological services should be examined with as much specificity aspossible. Two case studies have been conducted in Costa Rica to estimate the ecologicalbenefits of water resources, one initiated by the Tropical Science Center and another by theMinistry of Environment. The first study concludes that water prices should be increased upto 120% in order to reflect waters economic and ecological value. The second valuationstudy (Barrantes and Castro 1998), based on willingness to pay and economic benefits

derived from water, proposes a new tariff structure differentiated by economic sector andgeographic location.

Actions of upstream landowners may not be of value to hydroelectric companies if waterreservoirs are large and water does not need to be spilled.

The presence of other downstream users who share the benefits of water such as farmers


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REFERENCES

Barrantes G. and E. Castro. 1998.Valoracin Econmico Ecolgico del Agua en Costa Rica:Internalizacin del Valor de los Servicios Ambientales. San Jos, Costa Rica.

Chomitz, K., E. Brenes, and L. Constantino. 1998. Financing Environmental Services: The CostaRica Experience and its Implications. Paper prepared for Environmentally and SociallySustainable Development, Latin America and Caribbean Region, World Bank.Washington: World Bank.

Echavarria M., 2000. Personal communication. September 22 and 28, 2000.

1999. Policy Mechanisms for Watershed Conservation, Case Studies. Arlington, Virginia:The Nature Conservancy.

Gmez, L., Ministry of Environment and Energy (MINAE), Costa Rica. 2000. Personalcommunication. August 24, 2000.

Rojas, M., consultant, Eco-Asesores Integrados, Costa Rica. 2000. Personal communication.September 19 and 28, 2000.

Watershed Protection and Hydroelectric Energy: A New Approach to Rainforest Conservation,Agreement between Energa Global de Costa Rica and the Foundation for theDevelopment of the Central Volcanic Range (FUNDECOR).

Aylward B., International Institute for Environment and Development. 2000. Personal communication. September 25, 2000.

.


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CASE 3 - CAUCA RIVER, COLOMBIA: ASSOCIATIONS OF IRRIGATORS

PAYMENTS FOR IMPROVEMENT OF STREAM FLOW

BACKGROUND

The Cauca River watershed is one of the largest watersheds in Colombia. It drains a large,extremely fertile valley (roughly 200km per 15km) that provides food supply for Cali, the secondlargest city in Colombia. In 1959 the Government of Colombia created the Cauca ValleyCorporation (CVC), modeled on the United States Tennessee Valley Authority. The CVC was tobe responsible for allocating water between the different water users in the Cauca Valley and formanaging the upper watershed, which covers the slopes leading into the valley. Administrativerather than hydrological criteria defined the geographic boundaries of the area covered by CVC.

Although water resources are abundant in the region, in the late 1980s rapid urban, industrial,and agricultural development resulted in the valleys five million people experiencing a growingwater scarcity during the summer months and floods during the rainy season. Farmers wereespecially affected because the laws of Colombia require that water be allocated first to domesticusers. Because the CVC had insufficient financial resources to deal with this water shortage, rice

d d i d 12 i i d l il d

Summary

What water-related ecological service is being financed? Improvement of base flowsand reduction of sedimentation in irrigation canals.

Who is supplying the service? Upstream forest landowners.

Who is paying for it? Associations of irrigators and government agencies.

What instruments are being used? Payment for services:

-

Private voluntary payments by associations of irrigators to a government agency inorder to finance watershed activities.

-

Public payments by government agency to upstream landowners for watershedactivities

Property Acquisition government agencys acquisition of lands necessary forwatershed protection.

What are the intended impacts on forests? Reforestation particularly on steep slopes,erosion control, springs and waterway protection, and development of watershed


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communities. Improved watershed management will mean reforestation, particularly on steepslopes, erosion control, and protection of springs and waterways. No formal hydrological studyhas been conducted to establish a link between these activities and stream flow but there isanecdotal evidence that the program has contributed in stabilizing the basin and that the streamflow has improved. Local dwellers consider the fact that the Desbaratado River has notexperienced floods for the past ten years a sign that the program is producing results.

Who is supplying the service? Upstream forest landowners

Who is paying for it? Associations of irrigators and government agencies


! Payment for services

- Private: Voluntary payment by private association of irrigators. Water usersoriginally paid $0.50 per liter per second every trimester to the CVC for the right to wateraccess. This fee was calculated to cover CVCs administrative costs and was based ontheoretical water use for specific crop. Even when water supply became erratic and farmyields dropped, farmers were still paying the established water fee. The failure of this schemewas a major incentive for action. The water users in the associations voluntarily agreed to payan additional fee of $1.50 to $2.00 per liter per second per trimester to be put into a separatefund to be used by the CVC to finance those watershed activities necessary to improve streamflow. This additional fee level represents the willingness of the association members tofinance such activities. The fee level farmers were willing to pay is so high compared to theoriginal fee level that it may reflect part of their perceived opportunity cost of declining watersupply.

- Public: Contracts between the CVC and upstream forest landowners:CVC uses partof the fees paid by the irrigators to pay the upstream forest landowners for watershedactivities.

Property transfer

CVC also uses part of the associations funds to purchase land in critical hydrological areas.


In Colombia private associations are not legally empowered to implement watershed managementplans and must therefore work with the governmental entities. However, the existing regulatoryframework did support the establishment of water user associations. The associations alsobenefited from the long experience that farmers in the sugar cane sector have had in organizingthemselves In the majority of cases the organization of the associations was based on personal


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management activities and provides technical assistance to local communities and landownerscarrying out a variety of actions representing best practices.


There is insufficient available information to determine possible equity issues.


The program intends to improve forest management, to reforest much of the area, control erosion

and protect springs and waterways.


The experience of the Cauca River watershed has spread throughout Colombia. In areas wherethere is no public corporation such as the CVC, associations have built partnerships with theRegional Autonomous Corporations (RACs). The Government of Colombia had instituted RACsin regions throughout the country to coordinate watershed management efforts. On the privateside a Colombian Federation of Water Users is being established to facilitate the formation of

water user associations throughout the country.

In a similar situation in the Philippines a majority of those using the Makiling Forest Reservewaters agreed to pay an additional monthly fee to finance watershed protection activities. TheForest Reserve watershed, located within five municipalities, is composed of six majorwatersheds and covers about 4200 hectares. The fee level was established based on a willingnessto pay survey.

The following features are important to examine prior to establishing any private-public schemesimilar to that used in the Cauca River watershed:

Profitability of agriculture. The high profitability of agriculture in the Cauca Valley - largefarms producing high value crops with large nearby urban markets has meant that farmershave been willing and able to contribute additional funds to watershed activities.

Political stability. As with all mechanisms, the more solid and transparent the legal,economic, and administrative institutions the greater opportunity for success.

Cost-effectiveness. The cost-effectiveness of the program in the Cauca Valley has beenassumed but not evaluated.

Administrative Parameter of Watershed Projects. Problems can arise when, as is the casein the Cauca Valley the public corporation or agency that administers the watershed is not


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REFERENCES

Barbier, E. 1998. The value of water and watersheds: reconciling ecological and economic

externalities. Paper presented at Conference on Managing Human-dominatedEcosystems. St. Louis, Missouri. March 26-28, 1998.

Colegia San Pablo, Departamento del Valle del Cauca. http://www.pablus.net/sanpablo/valle.htm.Updated May 3, 2001(accessed May 10, 2001).

Cruz, R., L. A. Bugayong, P.C. Dolom, and N.O.Espiritu. 2000. Market-based instruments forwater resource conservation in Mt. Makiling, Philippines. Paper presented at 8th Biennial

Conference of the International Association for the Study of Common Property.Bloomington, Indiana. May 31 June 4, 2000.

Echavarria M. 1998. Informe sobre el tema del agua en Bolivia, Colombia, Chile, Ecuador,Paraguay y Peru. Arlington, Virginia: The Nature Conservancy.

2000. Personal communication. September 22 and 28, 2000.

2000. Valuation of water-related services to downstream users in rural watersheds:

Determining values for the use and protection of water sources. Paper presented onLand-Water Linkages in Rural Watersheds Electronic Workshop, United Nations Foodand Agriculture Organization. September 18 October 27, 2000.http://www.fao.org/ag/agl/watershed

Echavarria, M. and L. Lochman. 1999. Policy mechanisms for watershed conservation: Casestudies. Arlington, Virginia: The Nature Conservancy.
http://www.pablus.net/sanpablo/valle.htmhttp://www.pablus.net/sanpablo/valle.htmhttp://www.fao.org/ag/agl/watershedhttp://www.fao.org/ag/agl/watershedhttp://www.pablus.net/sanpablo/valle.htm


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CASE 4 - UNITED STATES: NUTRIENT TRADING

BACKGROUND

In many rivers in the United States increasingly high nutrient loads have dramatically reducedwater quality. Government regulations have traditionally tried to control water quality byestablishing fixed standards for quality and/or fixed levels of allowable discharge for particularpollutants from particular point source polluters. Point-source polluters are those who discharge

nutrients from a precisely localized source - often an industrial site or municipal sewage plant.Compliance costs have varied depending on the nature, scale, and location of the pollutingactivity, and to meet the regulatory standards for water quality point polluters have often have hadto invest in expensive waste reduction technology.

Legally set allowances have not been fixed for non-point source pollution, i.e., pollution fromdiffused sources, such as fertilizer run off from agricultural fields. Measurement of the pollutioncreated by non-point sources is difficult because of distance from the river, the nature of theeffluent and the fact that loads vary with weather events.

The regulatory system has not been successful in lowering the level of nutrients and therefore,advanced treatment plants have needed to be built everywhere to ensure the quality of drinkingwater. As an alternative to regulation, nutrient trading has recently been instituted in severalareas in the United States as aflexible, cost-effective and equitable way to achieve or exceedwater quality standards in watersheds and to give non-point sources a financial incentive to

Summary

What water-related ecological service is being financed? Improved water quality.

Who is supplying the service? Point source polluters discharging below allowablelevels and non-point unregulated sources reducing their pollution through such meansas adopting ecologically sound agricultural practices.

Who is paying for it? Polluting sources with discharges above allowable level.

What instruments are being used?Trading of nutrient reduction credits amongindustrial and agricultural polluting sources.

What are the intended impacts on forests? Because program focuses on industrial andagricultural polluters limited impact on forests - mainly establishment of trees in riparianareas.


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Pointpolluting sources with discharge below allowable levels and non-point sources that arereducing their pollution through adopting ecologically sound practices


Polluting sources with discharge above allowable level


Trading of pollution reduction credits amongsources allows polluters with low treatment costs toreduce their nutrient loads below allowable levels and sell the difference (a credit) to polluters forwhom buying credits is cheaper than compliance costs. Thus sources, both point and non-point,have an incentive to reduce their discharge sources so as to be able to trade and sell credits.

- Point - non-point credit exchange: Under point - non-point trading a cap is set on totaldischarge for a specific nutrient, load limits are established for point sources, and trading isallowed with non point sources. Point sources may find it more cost effective to purchasecredits from a non-point source that has reduced the amount of its discharge below the

approved limits rather than expending funds on expensive technology to reduce its owndischarge. Non-point source reduction is here a means to supplement point source reductionrather than a substitute. Point source and non-point source pollution has differentcharacteristics due to the greater uncertainty associated with non-point source pollution. Inorder to trade a unit of point source pollution reduction with a unit from a non-point source,an equivalency or a ratio needs to be established. In Minnesota, the Rahr MaltingCompany is allowed to increase its discharge on a tightly regulated segment of a watershed inexchange for financing agricultural conservation programs for which the company receives

reduction credit.

- Point - point credit exchange: This exchangemechanism does not require a ratio to beset. In the North Carolina Tar-Pamlico watershed, an association of point sources wasestablished and point sources within that association are allowed to trade with each otherunder a cap. If association members fail to stay under the cap, they pay into a fund to supportgovernment programs that encourage the adoption of best management practices by farmersin the watershed.


A strong regulatory framework is a prerequisite for trading. A monitoring system, standards, andtrading rules must be established to ensure that credits traded are really associated with ecologicalimprovements. A legal remedy must be available to assure that a credit traded by a pollutercorresponds to a true reduction in nutrient discharge


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A trading scheme transfers the burden of management and transaction costs from regulatoryauthorities to point sources. Control of point sources is easier and less politically risky than ofnon-point sources such as agriculture. Since industry bears most of the burden while theagricultural sector is the main contributor to the nutrient problem,it would arguably be moreequitable to treat and control agriculture as a point source and link the provision of agriculturalsubsidies to ecological improvement.


The trading system involves industrial and agricultural polluters and has no major impact onforests. The system does give incentives for establishing trees in riparian areas.


In the United States trading has been used successfully to obtain cost-effective reductions insulfur dioxide emissions. Carbon trading is a proposed option for addressing the build-up ofgreenhouse gas emissions that cause global warming; in countries such as Costa Rica carbon

trading has contributed to improving the profitability and the management of forest lands. But sofar, trading has not been as successful with water issues. However, several pilot trading programs,point-non point trading in the Saginaw Bay in Michigan, point-point trading in the Rock Riverwatershed in Wisconsin, and ad hoc trades in the Minnesota River Valley, have shown potentialfor cost savings and improved water quality.

The largest opportunity appears to be trading between point and non-point sources (Faeth 2000).Point-non-point trading programs are currently in place at the Dillon and Cherry Creek

Reservoirs which provide about half of the City of Denvers water supply and in North CarolinasTar-Pamlico Basin, and they are being considered in other places such as Connecticut, Minnesotaand Wisconsin. The feasibility of such trading appears to be limited to highly site-specificcircumstances but some think that it could be applicable in as many as 900 watersheds in theUnited States (Faeth 2000).

United States mitigation banking, initiated in the 1970s, is a similar scheme under which adeveloper who causes harm to wetlands can offset such harm by buying credits earned byprotecting, restoring, creating and/or enhancing another area of wetlands. In 1992 over 40 banks

were facilitating the rehabilitation of about 20,000 acres of wetland and at present severalhundred wetland banks are in operation.

When deciding whether trading is the optimal financial mechanism to insure water qualityimprovement several areas to be considered are:


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systems. In actuality when incentive payments ($5 to $10 per acre) were included the costrose to $48 to $70 per pound and this cost did not include transaction and enforcement costsnor the costs of an educational program designed to encourage landowners participation

(Senjem 1997).

Ecological, political and cultural site-specific issues:The site-specific characteristics of thewatershed may determine whether trading is the optimal approach. The effective use oftrading will depend on watershed characteristics such as landscape, number of dischargers,type of discharge, size and level of treatment, the level of water quality degradation, andwillingness of stakeholders to participate. The optimal design for effective implementationand compliance must be responsive to the following questions:

- Monitoring sources: Are there a few point sources, multiple non-point sources or acombination?

- Government involvement: Will there be government support for trading? Will thenecessary government regulations be established?

- Trading geographical boundaries: Are water quality standards best established forentire watersheds or for portions of the watershed? According to which criteria aregeographical boundaries for trading to be established?

- Hydrological relationships: Since trading design requires scientific knowledge ofhydrological relationships in the watershed, is such knowledge available?

- Possible adverse effects: How can the trading system ensure that it will not causelocalized adverse effects?

Fiscal issues:

- Value of credit: How should the price of a credit be determined? Is the price fixed or

variable? How much reduction in pollution is necessary to obtain a credit? How long arecredits good for? Can credits be resold if not needed? How long can they be unused?

- Value of equivalence ratios: What should be the number of units of pollution reductionthat a source must purchase to receive a credit for one unit of pollution from anothersource? How should the equivalence ratios between point source and non-point sourceloads be established?


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REFERENCES

Chesapeake Bay Program, Nutrient Trading. http://www.chesapeakebay.net/trading.htm.

Updated May 5, 2001 (accessed May 10, 2001).

Environomics. 1999. A summary of U. S. effluent trading and offset projects. Paper prepared forOffice of Water, U.S. Environmental Protection Agency. Washington, D.C.

Faeth, P. 2000. Fertile ground: Nutrient tradings potential to cost-effectively improve waterquality.Washington, DC: The World Resources Institute.

Senjem N. 1997. Pollutant trading for water quality improvement: A policy evaluation.Minnesota: Water Quality Division, Minnesota Pollution Control Agency.
http://www.chesapeakebay.net/http://www.chesapeakebay.net/http://www.chesapeakebay.net/


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CASE 5 - AUSTRALIA: WATER TRANSPIRAION CREDITS

BACKGROUND

The Mullay-Darling watershed covers more than one million square kilometers on the easternside of the Australian continent. Land use in the watershed ranges from urban to rural with vaststretches of wilderness in the northwestern area. Salinity is a natural feature of much of the basin,but land clearing particularly in the Macquarie River catchment area - has exacerbated the watersalinisation problem. Loss in vegetation cover results in less water being absorbed and in morewater being transferred to the atmosphere causing an increase in rainfall and a rise in the watertable. This rise in turns brings dissolved mineral salts to the soil surface. The resulting salinity

affects crop growth and yields.

State Forests is a New South Wales Government Trading Enterprise responsible for sustainablymanaging more 2 million hectares of public native forests and an expanding estate of hardwoodand softwood planted forests.

In October 1999, Macquarie River Food and Fiber (MRFF), anassociation of 600 irrigation farmers, entered into an agreement with State Forests to support treeplanting as a cost-effective strategy. The association purchases salinity credits from State Forestsbased on the amount of water transpired from 100 hectares of newly established forest in theUpper Macquarie catchment area. The State Forests then uses these funds to finance reforestation.


Several strategies have been used to reduce salinity in river systems: pumping and evaporatingsaline water, planting desalinization plants and replanting trees or other deep-rooted perennial

egetation On the land it o ns in the pper Macq arie Ri er catchment area State Forests has

Summary

What water-related ecological service is being financed? Reduction of watersalinity.

Who is supplying the service? State Forests of New South Wales.

Who is paying for it? An association of irrigation farmers.

What instruments are being used? Water transpiration credits earned byreforestation by State Forests and sold to irrigation farmers.

What are the intended impacts on forests? Large scale reforestation.


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An association of irrigation farmers


State Forests, as owners of the upstream land, earn transpiration or salinity reduction credits byplanting trees or other vegetation. The MRFF downstream water users purchase these salinitycredits. Prices are expressed in $ per million liters of additional transpiration per year, assumingone hectare of forest generates five million liters of transpiration per year. At the present time the

farmers pay $AUD17.0 per million liter of water transpired or a compensation of $AUD 85 perhectare per year. They have agreed to do so for ten years. So far the value of transpiration creditshas been established by trial and error. The valuation will ultimately be done by the market,reflecting the costs of other salinity reduction alternatives and the validity of the presentassumptions regarding forest transpiration.

For this to be a true trading scheme, forest cover targets will have to be established for individuallandowners or watershed areas so that the landowners could trade among themselves.


During the pilot stage there has been no need for changes to state or federal laws. If a tradingsystem were implemented after the pilot phase, the state or a watershed authority would need toestablish a legal framework and formal trading rules.


The public sector played a catalytic role in initiating the pilot project. Though State Forests, agovernment trading enterprise, was the seller of the salinity credits such a mechanism could beenvisaged between private actors with public sector intervention limited to establishing thenecessary legal and regulatory framework.


Where clearing of native vegetation has contributed to increased salinisation large scalereforestation must be done on a large scale in order to reverse the trend.


This pilot project was initiated a year ago and it is too early to evaluate trading performance. Itwas designed to test the possibility of generating a new market in water transpiration to benefitfarmers and other water users If the pilot is successful water users including farmers and


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Sophisticated regulatory and legal system can be established.

Since research indicates the necessity for large-scale reforestation, a large area must beavailable. As much as 40% of the cleared vegetation and forest must be restored to reverse

the salinity process. Funds from salinity credits are unlikely, on their own, to support sustainable forestry;

therefore, such projects may require additional financing.

REFERENCES

Brand D. 2000. Integrating landscape management with climate change issues. Paper presented atThe Australian Financial Review Third Annual Emission Forum, March 29-31, 2000.Sydney, Australia.

Brand, D., Director, Hancock Natural Resource Group. 2000. Personal communication.September 27, 2000.

Johnson, N. 2000. Strategies to build sustainable links between forests, water, and people, Paperpresented at Environmental Markets and Forests Workshop. April 11-12, 2000.Katoomba, Australia.


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CASE 6 - NEW YORK CITY: WATERSHED MANAGEMENT PROGRAM

Summary

What water-related ecological service is being financed? Purification of New YorkCitys water supply.

Who is supplying the service? Upstream forest landowners, farmers, and timbercompanies.

Who is paying for it?Most of the funds come from a New York City tax on water

users with supplemental funds from NYC bonds, the federal government, the State ofNew York, and local governments in the catchment area.

What instruments are being used? Financing:

- Taxation: Additional taxation on NYC water bills. (Beneficiary pays)- NYC Bonds- Trust Funds: Set up and financed by NYC.

Compensation to landowners:- Cost-sharing /Subsidy Program: Subsidies to farmers and forest

landholders for any additional costs associated with the adoption of bestmanagement practices.

- Logging permits for forest management improvements:Governmentprovides logging companies additional logging permits in return forimprovement of forest management services.

-

Differential land use taxation: Property tax reduction for better landmanagement practices.

Property transfer:- Government acquisition and transfer of development rights. Distribution

of government owned land development rights to farmers and landowners inexchange for agreements to follow best management practices.

-

Conservation easements. Government purchase of conservation easementsfrom private landowners that require retirement of certain ecologicallysignificant land from production.

- Purchase of hydrologically sensitive land.

Development of markets:


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BACKGROUND

New York Citys nine million residents receive 90% of their drinking water supply from the

predominantly rural Catskill and Delaware watersheds located about 125 miles from the city.Combined, these watersheds cover an area of approximately 1,600 square miles with a populationof around 77,000. Forests constitute 75% of the total land area in these watersheds and support astable forest industry with approximately 130 timber harvesters. The smaller and moreindustrialized Croton watershed supplies the other 10% of New York Citys drinking water.

The quality of the drinking water provided by these watersheds had historically been very highbut in the late 1980s there was a growing concern about microbial contamination. In 1989 the

United States Environmental Protection Agency (EPA) initiated a requirement that all surfacewater supplies be filtered, a requirement that could be waived if existing treatment processes ornatural conditions provided safe water. In response to the EPA New York City built a filtrationplant for the Croton watershed but in the Catskill/Delaware watershed decided to develop aprogram based largely on improvement of watershed management. The city hoped that thisprogram would improve water quality so that an additional purification plant would not benecessary. As a result of its actions the city received a temporary filtration waiver from the EPA

The Watershed Agricultural Council (WAC), a local organization, was formed to provide

leadership to improve land use practices and to support the economic development of localcommunities. The Catskill Watershed Development Corporation (CWDC), a non-profitorganization, administers the watershed program for the Catskill watershed.

What water-related ecological service is being financed?

The key assumption upon which the program is based is that improvements in farm and forestrypractices will significantly reduce microbial pathogens and phosphorus in the water. The key

uncertainty is whether this initiative can achieve standards of water quality in the time allotted inthe EPA waiver.

The major components of the NYC program in the Catskills/Delaware area are:

Upgrading and rehabilitation of infrastructure: The City paid $472 million to upgrade and

rehabilitate city-owned sewage treatment plants, dams and water supply facilities.

A watershed program: The watershed program consists of purchasing conservation easements

from farms, promoting forestand agricultural best management practices, institutingeducation and outreach programs, and working with the US Department of Agriculture on theConservation Reserve Enhancement Program (CREP).



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the city agreed to invest $1.0 to $1.5 billion over ten years in a watershed program principallyfinanced by a 9 % percent increase in the taxes on water bills over a five-year period. Building anew filtration plant would have required a twofold increase in taxpayers water bills.


Financing

-

Taxation. New York City residents voted to allow the government to levy additionaltaxes on their water bills.

-

New York City Bonds. NYC issued bonds for additional financing.

-

Trust Funds. NYC financed the Catskill Fund for the Future, a $60 million trust fundthat provided loans and grants for environmentally sustainable projects in the Catskillwatershed. Another Trust, the NYC Trust Fund, provided $240 million for water qualityand economic programs in the Catskill watershed and $70 million for programs in theDelaware watershed.

Compensation

- Cost-sharing /Subsidy Program. NYC provided $40 million to dairy farmers andforesters who adopted best management practices. Many farmers agreed to adopt suchpractices as long as the subsidy covered all additional associated costs. Of theapproximately 350 Catskill/Delaware dairy farmers, 317 agreed to participate in theprogram and so far 55 of them have instituted best management practices. The City doesnot provide any additional farm income support during the transition phase because suchpractices improve short-term profitability.

- Logging permits for forest management improvements. In return for improving forest

management practices, such as the adoption of low impact logging, the timber industrygets additional logging permits in areas to which they had no prior access.

- Differential land use taxation. Forest landowners owning 50 acres or more and willing

to commit to a ten-year forest management plan are eligible for an 80% reduction in localproperty tax.

Property transfer

-

Outright purchase of land:NYC is acquiring hydrologically sensitive land such asthat near reservoirs, wetlands, and watercourses.

G t i iti d t f f d l t i ht Th Cit l h


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United States Department of Agriculture (USDA) to retire environmentally sensitivelands from production. Case 9 of this paper discusses the United States ConservationReserve Program.

DEVELOPMENT OF MARKETS

-

New markets for non-timber products. To promote local economic development theWAC actively searches for ways to create new markets for non-timber products that inturn will create incentives to improve forest management and promote forestregeneration.

-

Timber Product Certification. The WAC is also exploring development of a marketfor wood products from Watershed Improved Timber harvesting or under SmartWood certification.


A number of federal, state and local regulatory changes were necessary to implement thewatershed management program including:

The EPA agreement to waive the filtration requirement provided time to develop a cost-effective alternative to achieving water quality.

A ten-year permit from the State Department of Environmental Conservation enabled theNYC to acquire land in the watersheds.

The revision of the long-standing New York State Watershed Rules and Regulations

established new standards for water facilities and construction projects and required City

review and approval of activities having potentially adverse effects on water quality.


Though NYC led the watershed management efforts, both the federal and state governmentsprovide financial and technical help to the project. USDA provides technical assistance andfinancial incentives to farmers under its Farm Bill Conservation Program. New York State grantsfinancial help to the Conservation Enhancement Program and the State Department ofConservation conducts water quality research and nutrient monitoring studies throughout the

watershed.


Some farmers made the decision to participate in the watershed because of concern that theymight be put out of business by imposed regulations Many farmers had lost land when the New


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Owners of forests have adopted best management practices, such as adoption of low impact

logging, and some environmentally sensitive croplands have been retired from productionallowing forests to regenerate.


The approach used by NYC can only be cost-effective and politically acceptable if the cost of thewatershed program is less than the cost of the additional filtration plant(s), and if the water usersare willing to be taxed to support the cost of the program. These factors rarely exist except when

there is a large downstream population benefiting from the hydrological services from upstreamlandowners and a manageable number of upstream landowners. NYC authorities used as itsmodel a similar program in the Netherlands. The approach may not be widely applicable in theUnited States because most cities already have sufficient filtration plants and the watershedssurrounding the cities are more commercially and industrially developed and more denselypopulated than in the Catskill/Delaware area.


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REFERENCES

Allen, S., New York Watershed Coordinator. 2000. Personal communication. October 10, 2000.

Barbier, E. 1998. The value of water and watersheds: Reconciling ecological and economicexternalities, Paper presented at Conference on Managing Human-dominatedEcosystems. St. Louis, Missouri. March 26-28, 1998.

Combe, R. Head, Watershed Agricultural Council. 2000. Personal communication. October 12,2000.

Echavarria, M. 1997. Water: Together we can care for it! Case study of a watershed conservationfund for Quito, Ecuador. Arlington, Virginia: The Nature Conservancy.

1999. Agua: valoracin del servicio ambiental que prestan las areas protegidas,AmericaVerde Training Manual 1:1. Arlington, Virginia: The Nature Conservancy.

2000. Personal communication. September 22, 2000.

Echavarria, M. and L.Lochman. 1999. Policy mechanisms for watershed conservation, case

studies.Arlington: The Nature Conservancy.

New York City Department of Environmental Protection. 2001.http://www.ci.nyc.ny.us/html/dep/.Updated May 3, 2001(accessed May 9, 2001).

NYCEP Watershed Forest Ad Hoc Task Force. 1996. Policy recommendations for the watershedof New York Citys water supply.New York: New York City Department ofEnvironmental Protection (NYCEP).

Office of Water, United States Department of Environmental Protection. 2001. WatershedProtection. http://www.epa.gov/OWOW/watershed/.Updated March 28, 2001 (accessedMay 9, 2001).

Router K., Outreach Officer, Watershed Agricultural Council. 2000. Personal communication.October 12, 2000.

Tomkinson-Church, M., Senior Advisor for International Water Policy, The Nature Conservancy.

2000. Personal communication. August 29, 2000 and October 3, 2000.
http://www.ci.nyc.ny.us/html/dep/http://www.epa.gov/OWOW/watershed/;http://www.epa.gov/OWOW/watershed/;http://www.ci.nyc.ny.us/html/dep/


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CASE 7 - COLOMBIA: ENVIRONMENTAL SERVICES TAX (Eco-tax) FORWATERSHED MANAGEMENT

BACKGROUND

Faced with dwindling ecological funds and an increasing need to protect hydrologically sensitiveforest areas, the Government of Colombia established Regional Autonomous Corporations

(RACs) in regions throughout the country to act as coordinators of watershed managementefforts. A national funding system was enacted to provide funds for watershed management to beused by the RACs, municipalities and private landowners.

What services are being financed?

The Colombian program is designed to finance watershed protection and enhancementthroughout Colombia so as to produce regularity of water flow for hydroelectricity productionand other industrial uses and regularity and water purity for drinking water supply. No localstudies have proved that improved forest management leads to better hydrological services.

Who is supplying the services?

RAC is in charge of over all watershed management. Municipalities manage their own watershedl d d i l d h i h d l i ll i i f

Summary

What water-related ecological services are being provided? Regularity ofwater flowfor hydroelectricity production and other industrial uses; regularity and water purity fordrinking water supply.

Who is supplying the services? Private land owners and municipalities that own

hydrologically sensitive land.

Who is paying for them?Municipalities and water using companies.

What instruments are being used? Environmental Services tax:Taxation of industrial water users on basis of water

use.

Direct payments: Payments from municipalities and watershed authorities to

private landowners for ecological services.

What are the intended impacts on forests? Improved forest management


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Who is paying for them?

Towns and departments: The Government of Colombia requires that towns and

departments allocate one percent of their budgets to purchase land in order to protect thosehydrographic basins on which the town and/or department relies for its water supply.

Electricity Sector: Hydroelectric power companies with capacity greater than10,000kilowatts must transfer three percent of gross electricity sales to the Regional AutonomousCorporations (RACs). Another three percent must be transferred to the municipalities inwhich the hydrological basins and reservoirs used by the power companies are located.

Other industrial users of water: Any corporation using water in it industrial processes isrequired to allocate one percent of its investments to the RAC for the protection of thehydrographic basin that provides its water.


Ecological Services Taxation (Eco-taxation):Companies benefiting from hydrologicalservices are taxed in relationship to their use of these services. The Eco-tax forceshydroelectric power companies and other industrial water users to recognize the value of the

ecological service, i.e. waterpower necessary for producing electricity or other products.

Public Payment by municipalities and departments to private landowners:

-

for watershed management of their private lands

-

to purchase hydrologically sensitive lands for watershed management by governmentagencies


At all levels of public government a major change in the legal and regulatory framework wasnecessary to implement the new initiative.


The fact that in Colombia private associations are not legally empowered to implement private

watershed management plans makes the administration of watershed management in Colombiaparticularly dependent on government action.


RACs are almost totall financed b local so rces 80% of their f nds come from propert ta es


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Improved forest management.


On the other hand eco-taxes can be found in many places around the world. In New York City, asdiscussed earlier, represents one such case where municipal water users were taxes to pay for theecological services provided by upstream landowners.

REFERENCES

Echavarria, M. 1998.Informe sobre el tema del agua en Bolivia, Colombia, Chile, Ecuador,Paraguay y Peru. Arlington, Virginia: The Nature Conservancy.

2000. Valuation of water-related services to downstream users in rural watersheds:Determining values for the use and protection of water sources. Land-Water Linkages inRural Watersheds: Background paper no. 4, FAO Electronic Workshop, September 18-October. 27, 2000. http://www.fao.org/ag/agl/watershed/papers/echavar.pdf.***

Kaimowitz D. 2000. Personal communication. August 22, 2000.

Rodrguez, M. and E. Ponce de Len. 1999. Financing the Green Plan (Plan Verde) inColombia: Challenges and opportunities. Paper presented at The Workshop on Financingof Sustainable Forest Management, PROFOR-UNDP Programme on Forests, London,October 11-13, 1999.
http://www.fao.org/ag/agl/watershed/papers/echavar.pdfhttp://www.fao.org/ag/agl/watershed/papers/echavar.pdfhttp://www.fao.org/ag/agl/watershed/papers/echavar.pdf


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CASE 8 - STATE OF PARAN, BRAZIL: PUBLIC SECTOR REDISTRIBUIONMECHANISM

BACKGROUND

Brazil has been actively promoting its protected areas as critical instruments for biodiversityconservation and watershed protection. Yet results have been unsatisfactory. Strict governmentregulations restricting forest exploitation and requiring property owners to rehabilitate degradedareas have reduced the profitability of the forest sector. Furthermore, laxity of enforcement hasprovided an incentive for landowners to disregard these regulations that have proven veryexpensive to follow.

At the state level the revenue distribution mechanisms discouraged conservation efforts by themunicipalities. A large part of municipalities revenues come from the state redistribution ofincome from the Circulation of Goods and Services (ICMS), an indirect tax charged onconsumption of goods and services. This sales tax is one of the largest sources of income for thestates. Though each state may establish its own criteria for 25% of these ICMS revenues theother 75% has to be allocated according to the fiscal value added generated by economicactivities within the municipality. Those municipalities with significant economic developmentand population density received more funds than municipalities with large protected areas. In

response to this problem, the State of Paran was the first Brazilian state to develop aredistribution mechanism to encourage environmentally sustainable activities.


Th f d di t ib t d b th St t f P t i i liti d i t f t

Summary

What water-related ecological service is being financed?Watershed protection andbiodiversity conservation.

Who is supplying the service? Municipalities and private landowners.

Who is paying for it? The State of Paran.

What instruments are being used? A public sectorredistribution mechanism throughwhich State governments allocate transfer payments on a competitive basis to thosemunicipalities with more water reserves, conservation units or protected areas.

What are the intended impacts on forests? Rehabilitation of degraded forest areas.


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protected areas and the other 2.5% to municipalities that have watersheds that supply water toneighboring municipalities. The transfer is basically a compensation for the opportunity costof development foregone by environmental protection but it is not calculated according to the

true opportunity cost nor according to scientifically established relationships between forestcover and water improvement. The municipalities are in competition with other municipalitieswithin Parana for the ecological ICMS. The more areas within the municipalities that areinvolved in ecological activities the more revenues the municipalities will receive from theState.


Because the Brazilian Constitution gives any state government the power to decide how it willdistribute 25% of the ICMS the State of Parana was able to make changes within its own laws toencourage municipalities to be active in practices that often resulted in maintenance andextension of forests.


Ecological ICMS are not generated through marketinstruments but constitute a public sectorredistribution mechanism. The distribution mechanisms are solely in the public sector - between

the states and the municipalities. The application of the Ecological ICMS and the associatedmonitoring effort require the devolution of most responsibilities for land and forest managementto the municipalities.


Some of the larger industrialized municipalities oppose the new distribution system as not fairbecause it lowers the importance of size and population.


Some degraded forest areas are being rehabilitated although the exact extent is not known.


There are indications that in the State of Paran the program has been successful in encouragingsome municipalities both to establish public conservation units and to assist landowners in

protecting and maintaining the ecological quality of their own lands. The area allocated forconservation units (for biodiversity) increased nine folds (WWF 1998) and the ICMSadministrators claim that the cost-effectiveness of the mechanism is remarkable. Costs forprogram administration were estimated to be as low as $32,000 (Echavarria 1999) although whichactivities are included in this estimation are not clear.


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A strong regulatory framework and decentralization of financial resources and responsibilities is acritical prerequisite to expand the model outside Brazil. To determine whether this system canact as a valuable model for use in other situations one must examine its performance and its

problems. The system in Paran has presented several problems:

Since the amount allocated in a given year is fixed, an increase in the number ofmunicipalities in the program may well result in dwindling resources available for eachmunicipality. If the resources allocated are too small to be an incentive for conservation thelong-term effectiveness of the program is questionable.

A possibility exists that municipalities may claim that areas were protected for the solepurpose of collecting financial transfers. Municipalities initially received a compensationpayment using two indices: 1) the proportion of municipal land under protection and 2) aconservation factor index associated with the management category of the area based onwhat ecological factor or factors were being protected - and the level of associated land userestriction. An attempt to assure actual ecological improvement led to another indexcalculated not just on the quality of the protected area but also on the interest of localcommunities, the l

case studies of markets and innovative financial mechanisms for water services from forests....

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